EGL Engility Holdings, Inc.

Notes to the Financial Statements

General

The following description of the Engility Master Savings Plan (the “Plan”) provides only general information. Participants should refer to the Plan document for a more complete description of the Plan’s provisions.

Engility Corporation (the “Company” or “Engility”), formerly known as Engility LLC and currently a wholly owned subsidiary of Engility Holdings, Inc., established the Plan to provide retirement benefits to eligible employees of the Company. The Plan was adopted and effective June 29, 2012. The Benefit Plan Committee, which consists of members appointed by the Board of Directors of Engility Holdings, Inc., is responsible for the overall administration of the Plan and serves as the Plan Administrator.

The Plan is a defined contribution plan under Section 401(k) of the U.S. Internal Revenue Code (“IRC”) and is designed to provide eligible employees with tax advantaged long-term savings for retirement. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended. Participants may direct their investment to a combination of different funds and investment alternatives, which are managed by Fidelity Management Trust Company (“FMTC”), as “Trustee.” Fidelity Workplace Services LLC provides record keeping services.

Effective December 31, 2015, the TASC, Inc. Savings Plan (the “TASC Savings Plan”) merged into the Plan and the TASC Savings Plan was terminated. Assets of $218.2 million were transferred directly from the TASC Savings Plan to the Plan during December 2015.  As of December 31, 2015, a receivable for $249.9 million was also transferred to the Plan for a total transfer of $468.1 million.

Participant Contributions

Effective January 1, 2016, an eligible Engility employee can generally participate in the Plan effective as of the date that such employee completes one hour of service with Engility, and may contribute from 1% to 75% of his or her total compensation, as defined in the Plan. Prior to January 1, 2016, an eligible Engility employee was able to contribute from 1% to 25% of his or her total compensation. Participants who have attained age 50 before the end of the plan year are eligible to make catch-up contributions from 1% to 50% of their total compensation up to the IRC limited catch-up contribution amount. Newly hired full-time employees of the Company will be deemed to have elected to contribute 3% of their total compensation each pay period to the Plan. Effective January 1, 2016, the contribution commences on the first payroll period on or after the 30th day following the employee’s date of hire. An employee may opt out of the automatic enrollment election before the 30th day or increase or decrease the percentage elected at any time in accordance with the rules established under the Plan. Prior to January 1, 2016, the contribution commenced on the first payroll period starting on or after the 60th day following the employee’s date of hire and an employee was able to opt out of the automatic enrollment election before the 60th day.  

A participant may elect to increase, decrease, suspend or resume contributions at any time in accordance with the rules established under the Plan, with the election becoming effective within the next two payroll periods. The IRC limited the maximum amount an employee may contribute on a pre-tax basis in 2016 to $18,000 for participants under 50 years of age and $24,000 for participants 50 years of age and over. Participants are 100% vested in their individual contributions and net earnings thereon. Participants have the option of investing their contributions in various investment options offered by the Plan, which include mutual funds, common/collective trust funds, and the Engility Stock Fund which invests in the common stock of Engility Holdings, Inc.  FMTC uses a stock purchase account (“SPA”) to house fractional shares of the Engility Stock Fund. SPA account balances are invested in the Fidelity Cash Reserves fund.

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An employee who is automatically enrolled in the Plan will have his or her pre-tax contributions invested in an investment fund designated by the Benefit Plan Committee as the qualified default investment alternative (“QDIA”) until such time as the employee makes an alternative investment election. Effective September 1, 2016, the QDIA for the Plan is the American Century Target Date Fund Income. Between December 31, 2015 and August 31, 2016, the QDIA for the Plan was the VOYA Target Fund by Age.  Prior to December 31, 2015, the QDIA for the Plan was the Fidelity Freedom Fund by Age.

Company Contributions and Vesting Provisions

Effective January 1, 2016, the Plan was amended to change the level of Company matching contributions to 100% of the first 3% of compensation that a participant contributes, and 50% of the next 3% of compensation the participant contributes, for a maximum Company contribution of 4.5% of compensation.  Part-time employees are not eligible for Company matching contributions. Between January 1, 2015 and December 31, 2015, the Company offered employer matching contributions at 100% of a participant's deferral up to 1.5% of his or her eligible compensation.  Effective January 1, 2016, participants who received Company contributions under the Plan on or after the Plan effective date vest in such contributions based on a three-year cliff vesting schedule.  Prior to January 1, 2016, participants who received Company contributions under the Plan vested in such contributions based on their period of employment with the Company as follows:

Participants in the TASC Savings Plan were 100% vested in employer matching contributions made under the TASC Savings Plan prior to 2016.

Participant Accounts

Each participant’s account is credited with the participant’s contribution and allocations of the Plan’s earnings (losses), and may be charged with certain administrative expenses. Allocations are based on participant eligible earnings or account balances, as defined. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s vested account.

The Plan provides for loans to active participants. Generally, participants may not have more than one loan outstanding at any time. The maximum loan allowed to each participant is the lesser of (1) $50,000 less the highest outstanding loan balance over the prior 12 months or (2) 50% of the vested value of the participant’s account in the Plan. The minimum loan amount is $1,000. The interest rate is based on the prime interest rate, as defined in the Plan document, plus 1 percent. Effective January 1, 2016, the maximum term of a loan is five years, or ten years if used to purchase a principal residence.  Prior to January 1, 2016, the maximum term of a loan was thirty years if used to purchase a principal residence.

Loan repayments are made through payroll deductions, with principal and interest credited to the participants’ fund accounts. Repayment of the entire balance is permitted at any time. Participant loans are collateralized by the participant’s vested account balance. Defaulted loans are treated as either actual or deemed distributions depending on the participant’s eligibility at the time the default occurs. Participant loans at December 31, 2016 and 2015 had interest rates ranging from 4.00% to 9.25%, maturing through 2044.  

Benefit Payments

Upon termination, participants may receive the vested portion of their account balance as soon as practicable after termination. Terminated participants who have an account balance in excess of $1,000 may elect to leave their account balance in the Plan and withdraw it at any time up to age 70  ¹ / ₂ , at which time withdrawal is mandatory by April 1 of the following year. A participant who terminates employment with a vested account balance of $1,000 or less shall receive an immediate payment of the vested account balance.

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A participant may withdraw after-tax contributions and rollovers at any time. A participant who has attained age 55 may withdraw his or her vested matching contribution and supplemental contribution. Also, a participant may withdraw pre-tax contributions before termination of employment or before reaching age 59 1/2 only for financial hardship. Financial hardship is determined pursuant to provisions of the Plan and the IRC. Generally, a penalty will be imposed on withdrawals made before the participant reaches age 59 1/2. In the event of retirement or termination of employment prior to age 59 1/2, funds may be rolled over to another qualified plan or individual retirement account without being subject to income tax or a penalty.

Basis of Accounting

The financial statements of the Plan are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), using the accrual basis of accounting.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and changes therein, and disclosures of contingent assets and liabilities. Actual results will differ from these estimates. The most significant estimate relates to valuations of investments in the Plan that are not traded in an active market.

Valuation of Investments

Investments are reported at fair value. The Plan's Administrator determines the Plan's valuation policies utilizing information provided by the Trustee. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Investments in mutual funds are valued at quoted market prices, which represent the net asset value per share as reported by FMTC. Refer to Note 3 for additional information and disclosure provided for the fair value of the Plan’s investments.

Shares of Engility Holdings, Inc. common stock are valued at the last reported quoted market price per share on the last trading day of the year.

The common/collective trust fund investments are valued at the Net Asset Value (“NAV”) provided by the administrator of the fund. Issues and redemptions of units are recorded upon receipt of unit holders’ instructions based on the determined NAV per unit, which is determined daily. The NAV is used as a practical expedient to estimate fair value. The NAV is based on the fair value of the underlying investments held by the fund less its liabilities. This practical expedient is not used when it is determined to be probable that the fund will sell the investment for an amount different than the reported NAV. For these funds, there are no unfunded commitments, redemption restrictions, and participants can transact daily.

The investments in self-directed brokerage accounts include cash and cash equivalents, mutual funds, common and preferred stock. The fair values of these investments are based on quoted market prices of the shares held at year end.

There have been no changes in the methodologies used at December 31, 2016 and 2015. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value could result in a different fair value measurement at the reporting date.

Valuation of Notes Receivable

Notes receivable from participants represent participant loans and are recorded at their unpaid principal balance plus any accrued, unpaid interest.

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Investment Transactions and Income

Investment transactions are accounted for on a trade date basis. Dividend income is recorded on the ex-dividend date. Interest income is recorded on an accrual basis. Gains and losses on sales of investment securities are determined based on the average cost method. Net appreciation (depreciation) in the fair value of investments includes the Plan’s gains and losses on investments bought and sold as well as held during the year.

Forfeitures

Non-vested Company contributions are forfeited upon a participant’s five-year break in service or withdrawal of the participant’s vested balance, if earlier, and are used to reduce employer contributions and pay for the Plan expenses. During the year ended December 31, 2016, $5.0 million was applied to reduce employer contributions. At December 31, 2016 and 2015, forfeited non-vested account balances available to offset future Company contributions and Plan expenses totaled $2.6 million and $4.2 million, respectively.

Benefit Payments

Benefit payments are recorded when paid.

Plan Expenses

The Plan provides for the payment of all its administrative expenses, including trustee, record keeping, consulting, audit and legal fees, from available forfeitures. Loan administration fees are charged to participants. Administrative and brokerage fees incurred by self-directed brokerage accounts are charged directly to the related participant’s brokerage account. In the event that forfeitures are not available, the Company pays for administrative expenses. Taxes and investment fees related to the stock or mutual funds are paid from the net assets of such funds.

Risks and Uncertainties

The Plan provides for various investment fund options, which in turn invest in any combination of stocks, bonds and other investment securities. Investment securities are exposed to various risks, such as interest rate, market and credit risk. Due to the level of risk associated with certain investment securities and the level of uncertainty related to changes in the value of investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants’ account balances and the value of investments reported in the Statements of Net Assets Available for Benefits.

The Plan’s investments are measured and recorded at fair value. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants. Valuation measures may not be indicative of net realizable value. The three levels of the fair value hierarchy are described below.

The asset or liability’s fair value measurement level within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. Valuation techniques maximize the use of relevant observable inputs and minimize the use of unobservable inputs.

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As of December 31, 2016, the Plan’s investments measured at fair value were as follows (in thousands):

As of December 31, 2015, the Plan’s investments measured at fair value were as follows (in thousands):

(a) Certain investments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented on the Statements of Net Assets Available for Benefits.

The Plan has received a determination letter from the Internal Revenue Service dated July 30, 2014, stating that the Plan is qualified under Section 401(k) of the IRC, and, therefore, the related trust is exempt from taxation. Once qualified, the Plan is required to operate in conformity with the IRC to maintain its qualification. The Plan has been amended since receiving this determination letter. The Plan Administrator believes the Plan is being operated in compliance with the applicable requirements of the IRC and, therefore, believes that the Plan, as amended, is qualified and the related trust is tax exempt.

Management evaluates tax positions taken by the Plan and recognizes a tax liability if the Plan has taken an uncertain position that more likely than not would not be sustained upon examination by the IRS. The Plan Administrator has analyzed the tax positions by the Plan, and has concluded that as of December 31, 2016 and 2015, there are no uncertain tax positions taken or expected to be taken that would require recognition of a liability or disclosure in the financial statements. The Plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits in progress.  The Plan Administrator believes it is not subject to income tax examinations prior to December 31, 2013.

Certain Plan investments are shares of mutual funds and units of common collective trust funds managed by FMTC and therefore these transactions qualify as party-in-interest transactions. Fees reimbursed by Fidelity Investments Institutional Operations Company, Inc. to the Company for record keeping services were approximately $214,000 for 2016.

The Plan’s interest in the Engility Stock Fund included 412,169 shares of Engility Holdings, Inc. common stock valued at $13.9 million at December 31, 2016. During 2016, the Plan purchased 182,772 shares of Engility Holdings, Inc. common stock for $5.2 million and sold 219,349 shares of Engility Holdings, Inc. common stock for $5.9 million. The Plan’s interest in the Engility Stock Fund included 448,745 shares of Engility Holdings, Inc. common stock valued at $14.6 million at December 31, 2015.  

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The Company can discontinue its contributions and/or terminate participation to employee groups at any or all of the divisions and/or subsidiaries of the Company at any time, subject to the provisions of ERISA. In the event that such a discontinuance and/or termination occurs for the entire Plan, participants in the Plan will become 100% vested in Company contributions and the net assets attributable to the Plan will be allocated among the participants and their beneficiaries in accordance with the provisions of ERISA.

Effective January 1, 2017, the Plan was amended to change the level of Company matching contributions to 50% of the first 8% of compensation that a participant contributes, for a maximum Company contribution of 4.0% of compensation.

The Plan has evaluated subsequent events through June 19, 2017, the date the financial statements were issued.

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